The California Department of Health Care Services, which supervises the state’s Medicaid program, Medi-Cal, was a participant, rather than a regulator, in the medical care market, which means that it did not violate the dormant Commerce Clause when it adopted Medi-Cal policies related to reimbursements to out-of-state hospitals, the Ninth Circuit has ruled. In reversing the lower court’s ruling, the Ninth Circuit concluded that the Department is a market participant because participation in the state Medicaid program is voluntary for the out-of-state hospitals, the Department is subject to the same market pressures and conditions as other insurers, and the Department engaged with the hospitals as any insurer would, without any downstream regulation (Asante v. California Department of Health Care Services, April 2, 2018, Fernandez, F.).

Background. Nineteen hospitals located along the California border but in states outside of California sued the California Department of Health Care Services and its director, contending that the Department’s Medi-Cal policies relating to Medi-Cal reimbursement to out-of-state hospitals violated the dormant Commerce Clause. The federal district court for the Northern District of California granted a partial summary judgment to the hospitals, ruling that some of the Department’s reimbursement policies regarding out-of-state hospitals violated the dormant Commerce Clause (see Out-of-state hospitals cry Medi-Cal discrimination, Commerce Clause to the rescue, December 22, 2015). The Department appealed to the Ninth Circuit.

Commerce Clause. In a dormant Commerce Clause claim, the party making the claim is asserting that a state is engaging in improper economic protectionism by protecting in-state economic interests at the expense of out-of-state economic interests. The U.S. Supreme Court has said, however, that a state is exempt from the dormant Commerce Clause when it acts as a market participant rather than as a market regulator (Dep’t of Revenue of Ky. v. Davis, 553 U.S. 328, 128 S. Ct. 1801, 170 L. Ed. 2d 685 (2008)). The Constitution, the Ninth Circuit said, does not limit the ability of the states themselves to operate freely in the free market. If they are acting as a participant, therefore, they may choose to favor their own citizens. The Supreme Court has already held that Maryland could favor in-state car-hulk processors, South Dakota could favor in-state cement sellers, and Kentucky could favor local municipal bond sellers. The state’s activity is exempt if it can be analogized to the activity of a private entity.

In this case, the Department sets reimbursement rates for hospitals in a manner just like any private insurer in the health insurance market. Participation in the California Medicaid market is voluntary; the out-of-state hospitals are not forced to participate. In addition, the Department is subject to the same market pressures and conditions as any health insurer. The closest analogy to this situation was a program in Alaska to purchase milk for children (Big Country Foods, Inc. v. Bd. Of Educ. Of Anchorage Sch. Dist., 952 F2d 1173 (9th Cir. 1992)). The state received federal funds to purchase benefits for its citizens, just as California did here. Then, as now, the state dealt with the providers without engaging in any downstream regulation. Then, as now, it did not try to tell third parties what they could or could not do. As a result, this court concluded, the Department was acting as a market participant rather than as a market regulator when it set policies for out-of-state hospital reimbursements.

The Ninth Circuit also rejected the hospitals’ argument that the Department is a regulator because the hospitals are required by law to render emergency services to everyone, including those who may be Medi-Cal beneficiaries. The Department, the court said, did not impose those burdens, which means that the fact that the hospital is required to follow the law does not convert the Department into a regulator.

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